Magazine

The Perils Of Unskilled Labor

November 06, 2005

For years, American workers have grown increasingly angry over the exodus of U.S. jobs to fast-industrializing India. Think auto parts manufacturing, call centers, computer help desks, or software programming jobs. So it's not without a bit of irony that we note this week that employers on the Indian subcontinent -- many of whom have built their business models on offering lower-cost labor to Western companies -- are now experiencing labor shortages that are pushing their own wages up.

It seems that all the foreign demand for India's bargain-priced manufacturing and high-tech labor -- plus a boom in construction and consumer services jobs sparked by India's heady internal growth -- has left skilled workers at a premium across the subcontinent. Wages for some semi-skilled textile factory workers have jumped 10% this year, while supervisors' salaries have risen by 20%. And overall Indian salaries will rise 12.3% this year, Mercer Human Resource Consulting figures, more than double the nation's inflation rate.

While many U.S. workers might view this as a fitting comeuppance for Indian industry, that would be wrong for several reasons. The developed nations look increasingly to the Third World to provide them with ever-cheaper items to maintain high living standards. Call that the Wal-Mart () effect. But too-rapid wage inflation in developing countries puts that symbiotic relationship at risk. Likewise, rising wages could fuel general inflation in India, slowing its economic growth and making Indian companies less able to buy high-value goods and services sold by First World companies. That eventually hurts Western workers as well.

The real problem for India isn't a lack of workers. In a nation where the population has tipped 1 billion, there's no shortage of warm bodies. Instead, India's ability to train new workers can't keep pace with its rapidly expanding economy's demand for manpower. For example, India's world-class elite universities boast fewer than 100,000 graduates each year. But its high schools graduate about 14 million students annually -- so nearly all go on to lesser universities or trade schools providing training beneath global standards.

The lesson here is that education, training, and development of intellectual infrastructure are every bit as important as low wages for today's global trading powers. (China recognized this early on; Mexico didn't.) Interestingly, that same message also offers hope for the more mature economies (and expensive workforces) of the U.S. and Europe. Continued investment in human capital may be their best hope to remain truly competitive in a world full of faster-growing, low-wage competitors. As India's current predicament shows, wages matter -- but skilled workers matter more.